News from Cass Business School

We’re not hard enough on banks, warns Lord Turner

Chairman of the FSA delivers annual lecture.

The required capital ratios for banks, of seven percent, outlined by Basel III should ideally be doubled and preferably tripled to 15-20 percent, according Lord Turner, Chairman of the FSA, who delivered his annual lecture at Cass Business School last night.

In front of packed audience of academics, students and senior City practitioners Lord Turner outlined his belief that "optimal equity capital ratios would be much higher than the proposed 7%" and discussed three compelling theoretical* arguments to support his argument:

• The adverse costs of even very rare banking crises are so great as to outweigh any marginal growth penalty resulting from higher equity ratios.

• The losses which the banking system may face are not simply exogenous shocks, but deeply endogenous to the system itself, and dependent on the subtle interplay of confidence and contagion.

• Macro-systemic stability of credit supply is the chief concern; risk of individual failure should not be an issue. Private sector arguments that liquidity ratios are too high miss this point.

Lord Turner made is clear that: "We are deluding ourselves if we think there is any one policy - a silver bullet - which will ensure a more stable financial system." He insisted that the notion that the notion that it might was nothing more than "a pre-crisis delusion."

So-called 'shadow banking' also came under scrutiny from Turner who argued that the non-banking institutions, such as hedge funds and structured credit vehicles, made the system "fundamentally unstable" and warned "fixating on the traditional banks alone will leave the door open for another crisis."

Adair Turner was appointed FSA Chairman in September 2008. He has combined careers in business, public policy and academia. He is a Visiting Professor at Cass Business School. He was speaking last night as part of the Dean's Lecture Series.

Resources: Lord Turner's speech.

Lord Turner's speech received extensive coverage in the press including: City AM, Daily Telegraph, Guardian, Financial Times (subscription required), The Independent and The New York Times

Share this article